Indian companies are expected to report improved sales growth for the three months ended September as a robust economy bolstered demand for goods and services, but higher input costs likely crimped profit growth in a replay of the story that unfolded in the June quarter, analysts say.

The earnings season starts on 14 October when Axis Bank Ltd, which is part of the National Stock Exchange’s Nifty index, releases its numbers for the September quarter. Axis Bank will be followed by technology bellwether Infosys Technologies Ltd the next day.

“Sales growth is likely to be better than expected, but margin pressure would continue,” said Ravindra Nath, vice-president of institutional equities at Asit C. Mehta Investment Intermediates Ltd.

The high cost of raw materials and other inputs has dented profit margins at companies in an economy where inflation is running at 8.5% currently, well above the Reserve Bank of India’s target of around 5%.

In the June quarter, although sales growth for companies on the 30-stock Sensex, the Bombay Stock Exchange benchmark and India’s most widely tracked index, was robust at 27%, profit grew by just 1.63% from a year ago, the lowest in six quarters.

But few analysts expect muted profit growth to influence the stock market. With few growth opportunities in developed markets, relentless buying by foreign funds has fuelled a rally on Indian markets.

The Sensex is trading at close to 20 times its estimated earnings for the fiscal ending March 2011 against its historical average of 15. On Friday, the index closed just 428 points shy of its historical closing high of 20,873 boosted by record foreign institutional investor (FII) inflows in excess of $18 billion (Rs80,460 crore) in 2010.

A 13 September Citigroup Global Markets research note said the “post result rush to upgrade earnings has not materialized” after the June quarter results announcements across Asian economies. This was a reversal from the previous four quarters and is likely to continue, the note added.

Indeed, there has been no change so far in the consensus EPS (earnings per share) estimate for the Sensex for the year to March 2011.

“This should not be a cause of concern as the base effect is now higher and there is clearly less operating leverage left than a year ago,” wrote Citigroup analysts Markus Rosgen and Yue Hin Pong.

“Nor is the third year of a recovery (2011 onwards) typically associated with strong earnings growth. In order to get operating leverage back into the business, we will need to keep an eye out for new capex” (capital expenditure), they wrote.

A market increasingly dependent on macro-economic cues may well shrug off the results season this time as well, analysts say. The Indian economy is forecast by the government to grow by 8.5% in the current fiscal.

“As long as topline growth remains in line, we are likely to see inflows continuing and the market maintaining its momentum,” said Ashu Madan, chief operating officer at Religare Securities Ltd.

The sudden surge of $6.7 billion in foreign inflows during September makes the markets somewhat vulnerable to a short-term correction, which shouldn’t be drawn-out given that there are enough buyers for the Indian growth story, said Raamdeo Agrawal, managing director at Motilal Oswal Financial Services Ltd.

The Sensex this year has out-performed the MSCI emerging markets index by 10% to give returns of 17% in calendar year 2010.

Corporate earnings growth is unlikely to match the pace of the rise in stock prices in the immediate term.

And while the banking and auto sectors are expected to post strong results, the impressive run-up in their stock prices means that there could be little upside left for many of these stocks.

A 20 September strategy note by Jyotivardhan Jaipuria and Anand Kumar of DSP Merrill Lynch (India) Ltd cautioned investors against buying these outperformers in the current rally as they appear expensive compared with their historical levels and are likely to underperform in the event of a correction.

Yet, stock-specific re-ratings are not ruled out even in these sectors.

According to Ajay Parmer of Emkay Global Financial Services Ltd, public sector banks in the mid-cap space and auto ancillaries could deliver positive surprises.

Most analysts remain bullish on the domestic consumption theme and expect makers of home and personal care products and consumer durables to post strong growth at least in terms of volumes.

A few commodity bets such as oil and gas, metals and mining seem to be back in favour with better results expected this time.

Cement, construction, telecom and steel, which have been underperforming, are unlikely to see upgrades anytime soon although analysts say the infrastructure sector will gradually pick up pace with companies reviving their capital expenditure plans.

In the case of information technology firms, exchange-rate fluctuations and uncertainty over European demand are expected to cloud earnings.